Weekly Technical Euro Rate Forecast: Bearish
- Both EUR/JPY and EUR/USD rates are under immense pressure, having made a number of key technical breaks to the downside in recent sessions.
- The April ECB meeting leaves the Euro at risk for major disappointment – or surprise – given how interest rates are priced.
- The IG Client Sentiment Index shows that the Euro holds a bearish view versus the US Dollar but a neutral view with respect to the Japanese Yen.
Recommended by Christopher Vecchio, CFA
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Euro’s Weak Points Exposed by Coronavirus Pandemic
After a decade of stagnant growth and failure to fully recover from The Great Recession and the Eurozone debt crisis, the European Union is ill-equipped to deal with the task at hand. The coronavirus pandemic demands coordinated efforts across institutions, borders, and boundaries, and in many respects, the EU has failed as its member states have failed one another.
Just last week, for example, it was announced that France and Germany had donated the most PPE to Italy; up last week’s announcements, Italy’s top two PPE donors were China and Russia over the course of the coronavirus pandemic.
And it was only on April 9, after all, that the Eurogroup agreed to a rescue deal that clocks in at €540 billion, in part made available through the well-worn European Stability Mechanism (ESM). But the coronavirus pandemic has exposed an old wound: the desire by the less fiscally stable member states to have a federalized European budget. Germany, Austria, and the Netherlands remain opposed to jointly-issued debt among member states, otherwise known as “Eurobonds” – just as the bloc of northern member states did throughout the crisis of the past decade.
As the coronavirus pandemic has exposed the fragilities of globalization – Western economies’ key medical supply chains are abroad – there will likely be a “re-shoring” over the coming months and years; a natural drift towards isolationism and nationalism.
And so, the European Union may be nearing a breaking point. A lack of a federalized response mechanism, blockaded by the more fiscally stable members of the EU, may be the spark that forces countries to turn inward even faster – and tear the union apart. The Euro has slowly been reflecting this fundamental risk: pairs like EUR/JPY and EUR/USD are displaying the potential for more technical weakness.
April ECB Meeting Will See Another Hold
If and when the ECB finally steps up to the plate to deliver, traders don’t believe that it will do so through the typical interest rates channel. According to overnight index swaps, the ECB is not expected to change rates through the end of 2020 (50% chance by December for a 10-bps rate cut), and the pricing for January 2021 still does not rise past our threshold of 55% (currently sitting at 53%).
EUROPEAN CENTRAL BANK INTEREST RATE EXPECTATIONS (APRIL 24, 2019) (TABLE 1)
It still holds that traders should expect something soon. Last weekend, ECB Governing Council member Francois Villeroy de Galhau said that, with inflation falling below 2%, despite the fact that interest rates remain very low and liquidity remains ample, “if we had to do more to fulfil the price stability mandate entrusted to us by the (EU) treaties, we will do more.“ It may be the case that the April ECB meeting yields unexpected, decisive action that has otherwise not been priced into markets yet.
EUR/USD Rate versus COT Net Non-Commercial Positioning: Daily Timeframe (April 2019 to April 2020) (Chart 1)
According to the CFTC’s COT report for the week ended April 21, speculators increased their net-long Euro positions from 86.6K to 87.2K contracts. Oversaturated long positioning leaves the Euro at risk for a covering move that ultimately pushes the Euro lower, especially as it sits near technical breakout territory.
EUR/USD RATE TECHNICAL ANALYSIS: DAILY CHART (April 2019 to April 2020) (CHART 2)
The symmetrical triangle that was forming in EUR/USD rates has yielded a downside break out, with EUR/USD having breached the monthly low set during the first week of April. To this end, bearish momentum has started to accelerate, with daily MACD declining while in bearish territory, while Slow Stochastics has moved towards oversold condition. There is agreement among the daily 5-, 8-, 13-, and 21-EMA envelope, which is in bearish sequential order. A re-test of the yearly low at 1.0636 is not out of the question.
IG Client Sentiment Index: EUR/USD Rate Forecast (April 24, 2020) (Chart 3)
EUR/USD: Retail trader data shows 49.78% of traders are net-long with the ratio of traders short to long at 1.01 to 1. The number of traders net-long is 9.14% higher than yesterday and 5.40% higher from last week, while the number of traders net-short is 6.88% lower than yesterday and 6.93% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/USD prices may continue to rise.
Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current EUR/USD price trend may soon reverse lower despite the fact traders remain net-short.
EUR/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (April 2019 to April 2020) (CHART 4)
After failing at the rising trendline going back to the 2012, 2016, and 2019 swing lows at the start of 2020. EUR/JPY rates have traded below their 2019 lows, breaking out of the symmetrical triangle along the way. The longer-term context of losses dating back to the 2018 suggests that more downside may be imminent in EUR/JPY rates.
At present time, bearish momentum has started to gather pace again. EUR/JPY rates are below their daily 5, 8-, 13-, and 21-EMA envelope, which is in bearish sequential order. Daily MACD is trending lower in bearish territory, while Slow Stochastics have fallen into oversold condition. Bearish momentum may seem soft, but the conditions are in place for a more aggressive breakdown.
IG Client Sentiment Index: EUR/JPY Rate Forecast (April 24, 2020) (Chart 5)
EUR/JPY: Retail trader data shows 59.42% of traders are net-long with the ratio of traders long to short at 1.46 to 1. The number of traders net-long is 7.51% higher than yesterday and 1.85% lower from last week, while the number of traders net-short is 9.01% higher than yesterday and 8.55% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/JPY prices may continue to fall.
Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current EUR/JPY price trend may soon reverse higher despite the fact traders remain net-long.
Recommended by Christopher Vecchio, CFA
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— Written by Christopher Vecchio, CFA, Senior Currency Strategist